National or Regional Currency: Pakistani Rupee, PKR
Population: 174,578,558 (July 2009 est.)
Area: total: 796,095 sq km
Status: 27th largest economy in the world in terms of purchasing power, and the 45th largest in absolute dollar terms.

Monday, December 27, 2010

Pakistan ends 2010 as sick man of South Asia

Pakistan remains the world's never-ending question. As 2010 concludes, several outstanding issues continue to bedevil the country. How they are managed in the year ahead will determine not only Pakistan's immediate future and long-term prospects, but also the security of its region and, indeed, much of the world.

It has been said — without exaggeration — that Pakistan faces an existential threat. The country has not defined a coherent approach towards those who are resorting to terrorism to advance their agendas, both within Pakistan and abroad. It remains uncommitted to the idea of denying sanctuaries on its territory to Taliban fighters battling American and Nato troops in Afghanistan. Relations with India have soured in recent months, because Pakistan's government is once again lending diplomatic support to the insurgency in Indian-administered Kashmir.

Domestic terrorism in Pakistan has taken a heavy human and economic toll. It is no longer aimed at official support of US-led anti-terrorism activities. Extremists now target minority groups as well as other Muslim sects. Some 800 liberal and Sufi Islamic scholars have died in targeted killings by extremist groups who receive financial assistance from like-minded people in the Middle East, and some Sufi shrines have been bombed.

The economy is in shambles, and unable to meet the International Monetary Fund demands for its continued support. If the International Monetary Fund (IMF) terminates its current programme, Pakistan will be unable to service its foreign debt. Indeed, a senior cabinet minister suggested recently that the international community should write off Pakistan's debts — an amount estimated at $40 billion (Dh146.8 billion). The minister of finance forcefully repudiated the suggestion the following day, indicating that the government has not developed a consistent approach towards the faltering economy.
The economy was also badly hurt by the massive floods of 2010, which caused damage estimated at $10 billion. This damage could lower annual GDP growth by 1-1.5 per cent for several years to come. In the 2010-11 fiscal year, the IMF estimates that economic output will increase by less than 3 per cent — one-third the rate expected in neighbouring India and less than half that of Bangladesh.

Slower economic growth will cause a shortfall of jobs for new entrants to the workforce, thereby increasing the incidence of poverty. Indeed, the number of people living in absolute poverty is likely to increase by 10 million, bringing the total to more than 70 million, or 40 per cent of the population. Pakistan thus ends 2010 as the sick man of South Asia.The political system also remains unsettled. Despite passage in July of the 18th amendment to the Pakistani constitution, which restored it to the form in which it was promulgated in 1973, political and executive authority remains in the hands of President Asif Ali Zardari.

The changes are supposed to make the executive branch accountable to the elected parliament, expand the prime minister's authority, devolve more power to the provinces, and ensure independence to the judiciary. In late 2009, the president also approved the seventh National Finance Commission, which will allocate to the provinces a larger share of the revenues collected by the central government. But a significant transfer of power from the presidency to parliament, or from the central to provincial governments, has yet to be brought about.

Military bugbear

Worse yet, the military remains outside civilian control. General Ashfaq Pervez Kayani's term in office, which was set to expire in November, was extended by three years. Thus empowered, the general has been able to exert his influence over foreign policy, in particular in defining the country's relations with the US, India, and Afghanistan. Even though the US offered $2 billion of assistance to the military to be disbursed over a period of 3-5 years, Kayani has resisted American pressure to move against the Taliban's sanctuary in North Waziristan, used to stage operations against US and Nato troops in southern and eastern Afghanistan.

So, is a further increase in violence by various extremist groups likely? Will the economy collapse if the IMF withdraws its support? Will the US increase its pressure by intervening militarily if Pakistan continues to harbour Taliban fighters operating from the tribal areas? Will the military subvert the constitutional changes aimed at reforming the political system?

Despite all the grim news and auguries, there is some hope, owing to the increased political mobilisation of Pakistan's middle classes, whose members have finally begun to question those espousing extremism. The judiciary is also more active, and is attempting to force the executive to remain within the bounds of the constitution.

Moreover, a trade agreement with Afghanistan that allows Afghan goods to cross Pakistan en route to India may be one step towards an improvement of economic relations with that large and rapidly growing neighbour.

Indeed, an able economic team that has been installed in the government seems — at long last — to be addressing some of the economy's deep structural flaws. As India in the 1990's and Brazil in the early 2000's showed, economies in deep distress can recover quickly once the right policies are implemented. It could also happen in Pakistan, which would help to solve other, seemingly intractable problems.

So all hope is not lost in Pakistan. On the contrary, 2011 may well prove to be a better year for a battered economy and a political system under stress.